S&P survives initial tests of the 50-day average

Focus: Internet, AAPL, AKAM, VCLK, LEAP, AGN, NLC, DGIT, ADCT

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CINCINNATI (MarketWatch) -- After peaking last week, the U.S. markets have pulled in considerably from the highs.

Yet to this point, the S&P has survived a test of its 50-day moving average -- admittedly, just barely -- keeping the U.S. markets' recovery attempt intact.

The charts below add color.

The S&P 500's hourly view details the past three weeks.

As the chart illustrates, the index has sold off notably from the highs, edging just under its 50-day moving average on Monday.

Its 50-day currently holds at 790, and is followed closely by additional support around 780. (Tuesday's positive bias places it back atop the 50-day.)

Meanwhile, the Dow's near-term backdrop is similar.

With Monday's downturn, it edged under the 7,550 support, and struggled to reclaim that level.

Still, the Dow bottomed intraday at 7,437 -- closely matching the November low -- before rising to close at 7,522.

And not surprisingly, the Nasdaq has also pulled in.

As the chart illustrates, it gapped lower on Monday before finding support around 1,488.

From current levels, first resistance holds at 1,517, matching the bottom of Monday's gap.

Widening the view to six months adds color.

Notice that Monday's close held at 1,501, closely matching its former downtrend.

At the same time, the pullback has come on lighter relative volume, keeping the Nasdaq's recovery attempt intact.

Moving to the Dow, it's the weakest major benchmark, but its recovery attempt remains in play.

With Monday's downturn, it edged back under its 50-day moving average, which currently holds at 7,570. (The Dow closed Monday at 7,522.)

Conversely, the index found support around the November low, lifting from an intraday trough of 7,437.

And the S&P 500 has pulled in for another significant test.

Namely, the index closed Monday at 787.5, or just under its 50-day moving average, currently 790.

On the next upturn, it faces initial resistance around 804, matching the January low.

The bigger picture

After peaking last week, the U.S. markets have pulled in notably.

Recent weakness makes for a more balanced technical backdrop, and it's worth delving straight into the bull/bear debate.

To be clear at the outset, the details below focus solely on the near-term outlook. The primary trend remains lower until further technical repairs take hold.

The bear case

Starting with the bear case, it falls out as follows:

Perhaps most importantly, Monday's sell-off was driven by 19-to-1 negative market breadth. This frequently marks the early signs of a more significant downturn.

The S&P 500 had edged under its 50-day moving average at Monday's close. It's struggling to hold the recovery attempt.

At current levels, the S&P holds 18% above the absolute March low, and 16% above the March closing low. Even in the best-case scenario, a sideways consolidation phase is long overdue.

The primary trend is lower, and when in doubt, it gets the nod.

The bull case

Now for the bull case:

The March rally has been unusually powerful, punctuated by 20-to-1 and 40-to-1 up days. One strong down day may not alter the near-term outlook.

The S&P has already pulled in 5.5% in just two days. While 20% bloodlettings have become the norm, the current pullback is already deep by conventional standards. Consider that the S&P traversed a five-year span earlier this decade without a single 10% correction.

The S&P closed Monday just three points under its 50-day moving average. Not exactly a decisive break lower.

The pullback to the 50-day is arguably the entry traders were seeking.

And the chart below adds one final bull point:

The SPDR Trust is an ETF that tracks the S&P 500.

And very simply, the recent two-day pullback has come on the month's lightest volume.

A more aggressive sell-off is needed to confirm a downturn.

Summing up the backdrop

As detailed above, both bulls and bears can make a case.

That means the March rally seems to be tiring, and a consolidation phase -- a period of sideways chopping around -- is likely in order.

Yet barring further follow through, it's tough to get much more "bearish" than that. In fact, the near-term backdrop remains constructive.

Looking ahead, the S&P's 50-day moving average now holds at 790, and the 2002 low rests at 768.

Its response to these areas should set the near-term tone.

Namely, if the markets stabilize around current levels, the near-term recovery attempt is intact. Conversely, if volume picks up, and market breadth remains sharply negative, a more defensive view will be advisable.

Tuesday's watch list

The charts below highlight names well positioned technically. These are intended as radar screen names - sectors or stocks positioned to move near term. For the original comments on the stocks below, check out The Technical Indicator Library.

Index

Symbol

Mon Close

Support

Resistance

Internet Index

IIX

147.4

145.0

154.8

Last profiled March 12, the Internet Index remains among the stronger sectors.

At the March trough, the group bottomed well above the November low exhibiting relative strength vs. the broad markets.

And on the ensuing rally, it's edged to five-month highs, clearing resistance at the January and February peaks.

The group's recent consolidation has been orderly, placing it at a better entry near the breakout point.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.